You have your eyes on a new set of wheels and know exactly what car you want. But before heading to the dealership, you’ll want to take some steps to prep your finances for buying a new car. After all, not preparing ahead of time can cost you, big. Here are five ways to get your money sitch ready before stepping foot on a car lot.
1. Check your credit report
Did you know that your credit can affect what interest rates you’re eligible for? It’s true. In order to make sure all of your information is up-to-date and correct, you’ll want to check your credit report. Your credit report is a detailed history of your credit accounts and payment history. The information in your credit report affects your credit score as well, so if something is incorrect, everything could be off — and it could cost you in the form of higher interest rates. A 2012 study by the Federal Trade Commission found that one in five consumers had an error in their credit report. The report also found that those who corrected the errors had a credit score boost, making them eligible for better interest rates. So what if you find an error? The Federal Trade Commission recommends these steps to dispute the errors.
2. Check your credit score
Your credit report includes your comprehensive credit history. This information is used to create your credit score, which is a three-digit number that tells lenders how “creditworthy” you are. In other words, how likely you are to repay your loan and be a responsible borrower. Having a good credit score can help you qualify for competitive interest rates, so it’s best to know where you stand. According to Experian, a good credit score is 700 or above. You can find valuable tools to track your credit score online. Your credit card or bank may also offer you access to your credit score. Credit bureaus keep track of whether or not you make payments on time on your existing debt. Your payment history can significantly affect your credit score, so if you want to boost your credit, make all of your credit card and loan payments on-time.
3. Save for a down payment
As a car shopper, you’ll want to empower yourself and come to the car-buying process with a down payment. Just how much should you save? A good benchmark is about 12 percent of the purchase price. If you need a little help saving, consider using an app which makes saving for specific goals like buying a car a bit more fun. They’re usually free and you can customize your saving plan through rounding-up of your purchases or setting a schedule and more.
4. Create a realistic budget
When you’re preparing to buy a new car, it’s easy to get swept up in all the options. After all, there’s Kia, Tesla, and Mercedes-Benz (oh my!). Shiny, new cars with cool features that you’ll love driving — and being seen in. But remember, looks aren’t everything. And they can fade fast. You’ll want to be realistic about how much car you can actually afford. Unlike other costly items, like a house or a college degree, cars are an asset that automatically depreciate once you drive off the lot. In other words, your new car will likely never be worth what you paid for it. Take a look at your income and expenses and see what you can comfortably afford in payments. Your budget should help you choose your car, rather than picking out a car and adjusting your budget from there. Why? Because it’s super easy to rationalize your way into spending more money than you really have, or really need to.
5. Figure out a plan for your current car sitch
If you’re getting ready to buy a new car, you’re probably replacing one that you currently have. In order to prep your finances to buy a new car and keep your finances straight, you want to figure out a plan with your current car. Are you going to get rid of it and sell it? How much would it be worth, if you traded it in at the dealership? Maybe you’re keeping the car as a second car. In that case, understand how your new wheels will add to your bottom line. After all, you may have double the payments and more costs. You want to have an idea how both vehicles together will affect your overall finances.
Bottom line
Buying a car can be an exciting and sometimes daunting process. But taking these steps ahead of time can put you in a good position to make the right decision and go home with car of your dreams — with your wallet intact.